Producer’s Share of SoundExchange Royalties

We often get questions about whether producers get a share of webcasting royalties. Let’s get one thing straight first of all: SoundExchange deals with the limited performance right for sound recordings available in the U.S. This is not about songs or publishing.

Remember–producers get paid a share of the artist royalty, usually from all sources. Take the example of a producer getting a royalty in a mid-to-major label deal structure. The artist has already signed to the record company and is getting paid an “all-in” artist royalty. The artist’s record deal will almost invariably require the artist to hire the producer, mixer, engineer and other recording personnel and pay them out of the recording budget.

Producers will typically get paid a cash payment, some or all of which will be an advance, and will also receive a producer royalty. (Some mixers or remixers also get a royalty, and the structure is essentially the same in those deals.)

An “all-in” artist royalty means that the label and artist have agreed that no matter who the artist hires as a producer, that producer’s royalty is included in the artist’s royalty. Another way of saying this is that the producer gets a share of the artist’s royalty and the producer’s share reduces the royalty the label pays to the artist. In order for the artist to pay royalties to the producer directly from their record company, the artist must send the record company a “letter of direction” that instructs the record company to pay the producer according to the producer’s contract with the artist.

This is because the producer is hired by the artist and not by the record company (or at least not since about the mid-to-late 1970s or so) and the producer is not a party to the record deal (assuming the artist is signed directly to the label and not through a production deal). Artists and producers solve this by the artist sending an instruction to their record company (the “letter of direction”) telling the label to pay the producer’s royalty directly and reduce the artist’s royalty by the amount paid to the producer.

Because producers were not allocated a share of artist royalties by law when the webcasting royalties were passed, the artist must follow an analogous process by sending SoundExchange an instruction to pay a share of the artist’s royalties (called the “featured artist” share of royalties) to the producer. That instruction is called a “letter of direction”.

How much should the producer be paid? This will always be expressed as a percentage of what the artist would otherwise be paid. This can be a little confusing because in the record deal context we speak of producers getting “points” as in “she’s a 4 point producer”. What does this mean?

A “4 point producer” means that the producer gets a royalty rate of 4% on the same basis as the artist. Let’s say an artist gets a 16% all-in royalty. In that case a 4 point producer would get 4 of those 16 points leaving the artist with 12. That rate gets applied to what are typically called “royalty base price” sales that involve a wholesale price, like CDs or permanent downloads.

If there is revenue to the artist from something other than a royalty base price sale, let’s say a master license for a movie or statutory royalties from SoundExchange, there’s no royalty base price but the producer’s contract still entitles them to a share of that revenue. In this case, we have to calculate that percentage. The way that calculation is typically done is by expressing the producer royalty as a percentage of the artist revenue.

In our example, a 4 point producer on a 16 point all-in artist royalty is actually getting 4/16ths of the revenue, or 25%. So in the case of the movie license, the producer would get 25% of the artist’s share of the license fee. In the case of SoundExchange royalties, the producer’s letter of direction would instruct SoundExchange to pay the producer 25% of the featured artist share of royalties.

If you have questions about how to get paid as a producer or how to pay your producer if you are an artist, the best place to start is at the SoundExchange website and download the SoundExchange letter of direction packet.

No one can know how a statutory share of performance royalties would be given effect in the future, but it would probably be administered by SoundExchange the same way that the featured artist share of royalties is currently administered. Because we can’t know how much that statutory rate would be, artists should negotiate with producers for the lesser of the statutory rate or the contract rate, and producers should negotiate with artists for the greater of the two.

Needless to say, there is a lot more to producer agreements than what we have covered here and there may be a lot of twists and turns as more companies use direct deals. One thing is certain: if there’s no letter of direction, you’re not starting from a good place.